Hearing: Hearing On Members Proposals On Tax Issues Introduced In The 109th Congress

Statement

Hearing: Hearing On Members Proposals On Tax Issues Introduced In The 109th Congress

Chairman Camp, Ranking Member McNulty and members of the Subcommittee:

Thank you for holding this important hearing on tax legislation introduced by members in the 109th Congress. I am pleased to be here today to discuss the Fair Flat Tax Act (H.R. 5176), the comprehensive tax reform legislation I introduced in April 2006. Senator Ron Wyden and I worked together on this measure, and he has introduced similar legislation.

It has been twenty years since the last major tax reform was signed into law. Since then, the tax code has become more complicated and burdensome. Put bluntly, it no longer works for middle-class families and small businesses.

Current tax policies have created a culture of cheating and a tax gap of $353 billion, leaving the middle-class to pick up the slack for those who refuse to obey the law. Worse yet, the tax code accentuates the income disparities that have arisen in last few years. The tax code is no longer designed to create economic growth, but instead to favor those with influence in Washington, D.C.

Middle-class families recognize these inequities and are losing faith in the fundamental fairness of the system, an ominous sign for a tax regime based on voluntary compliance.

I introduced the Fair Flat Tax Act to address these issues. It is intended to make the tax code flatter, simpler, fairer and more conducive to economic growth.

The major themes of the Fair Flat Tax Act are simplification, a re-setting of priorities to reward work, and tax relief for the middle-class.

To that end, here are a few key points on this legislation:

First, my legislation offers simplification for every taxpayer. The six individual rates are collapsed into three progressive rates of fifteen percent, twenty-five percent and thirty-five percent, and income from all sources is taxed the same. Each taxpayer can also use a simple, one-page 1040 form. This will save the average taxpayer 31 hours of tax preparation time and countless headaches per year.

Second, those earning less than $150,000 - more than eighty percent of taxpayers - will receive a tax cut.

Third, real tax reform must include a long-term solution to protect middle-class taxpayers from the expanding reach of the Alternative Minimum Tax (AMT). Without a fix, The AMT will hit 19 million taxpayers next year and 33 million by 2010, up from just 1 million in 1999. My legislation eliminates the AMT forever.

Fourth, it triples the standard deduction from $5,000 to $15,000 for individuals and from $10,000 to $30,000 for married couples.

Fifth, capital gains and wages are treated the same for tax purposes. There is no reason why a teacher's pay should be taxed at a higher rate than a chief executive officer's stock dividends.

Not to mention the fact that capital gains tax rates have shown no correlation with real Gross Domestic Product growth over the last 45 years - and capital gains rates have changed a dozen times over that period. Additionally, according to a recent Federal Reserve white paper, the 2003 dividend and capital gains tax cut did not raise U.S. stock values.

Sixth, it simplifies and flattens the corporate tax code by eliminating tax shelters, subsidies, and corporate welfare and instituting a flat thirty-five percent tax rate. Sixty-five percent of U.S. corporations paid no federal income taxes from 1996 through 2000, and ninety-four percent reported tax liability of less than five percent of their total income in 2000.

A thirty-five percent corporate tax rate will level the playing field and should be good news for chief financial officers and for the Treasury Department alike. Moreover, corporations will still be able to take important deductions for health insurance, research and development and employer-provided tuition under my legislation.

Finally, my legislation includes four "super incentives" to help Americans build the pillars of middle-class life: raising a family, buying a home, paying for college and saving for retirement.

Nowhere is the need for tax reform more urgent than in the area of education incentives. These incentives are designed to help families, yet the forms and the instructions are nearly indecipherable. For instance, the Internal Revenue Service instruction booklet for the various current education incentives is eighty-five pages long.

The College Tax Credit I am proposing would cut that booklet in half. This credit replaces the Hope Scholarship; the Lifetime Learning Credit; the deduction for higher education expenses; the exclusion of employee-provided education benefits; and the exclusion for qualified tuition reductions, with a $3,000-a-year credit available to students and families for four years of college and two years of graduate school. It will help 6 million full-time students enrolled in college and would be fully refundable.

The second "super incentive," the Simplified Family Credit, replaces three existing tax incentives while rewarding work and discouraging dependency. It condenses the Earned Income Tax Credit, the Child Credit, and the Dependent Credit into one easy-to-use credit for working families with children while providing more benefits to more families than all of them combined. At the same time, it will eliminate 200 pages of the tax code.

The third "super incentive" is a Universal Mortgage Deduction, a mortgage interest deduction available to all homeowners, not just to those who itemize. The current mortgage interest deduction unfairly benefits wealthier households because they are overwhelmingly the ones who itemize. As a result, the average benefit for households with incomes over $200,000 is thirty times the average benefit for those with incomes between $30,000 and $40,000. This provision will help level the playing field.

Finally, my legislation addresses the unacceptably low savings rate in this country by creating a Universal Pension (UP) to replace the "alphabet soup" of 16 existing IRA-type accounts with a single, portable retirement account for all workers.

This legislation gives workers the opportunity to transfer vested amounts from their employer-provided retirement accounts to the UP at any time. Moreover, when they separate from their employment, 401(k) balances would automatically transfer to the UP.

The Fair Flat Tax Act is fiscally responsible legislation. It eliminates tens of billions of dollars each year in special interest provisions, tax shelters and reporting loopholes, demonstrating that can reduce the tax burden on middle-class families, make the tax code simpler and reduce the deficit, as we did in the 1990s.

I hope that this legislation will galvanize both houses of Congress to pursue real tax reform for the middle class. I am eager to work with the Administration and with my colleagues in Congress to pass real tax reform that simplifies the tax code and makes it fairer for all Americans.

Thank you very much. I would be happy to answer any questions you may have.

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